Using the Bank of Mum & Dad, or Granny & Grandpa, for buying your first home comes with some serious caveats, says Sophie Mazzier.
It seems as if Prince Harry isn’t the only one to turn to grandparents for help…. (For those who haven’t seen the video clip Their Royal Highnesses are seen giving a pithy retort to Barack and Michelle Obama's Invictus Games challenge.) First time buyers are also looking to their elders for help, specifically the Bank of Mum and Dad (or Granny and Grandpa) to help them with a deposit for a step onto the housing ladder. But as always there are a number of issues which both parties should consider carefully at the outset, because it really is a case of looking a gift horse in the mouth.
If the contribution towards the purchase price is an outright gift, this is ostensibly good estate planning for the donor if he or she can afford to make the gift (a potential exempt transfer or ‘PET’). However, as readers will be aware from the furore which arose over the gift to David Cameron from his mother, the donor will have to have the ‘temerity’ to survive the gift by 7 years in order to prevent an associated IHT charge. Perhaps less well known is the fact that the primary liability for the inheritance tax on the ‘failed’ PET lies with the donee. It may be worth persuading the generous grandparent to take out term assurance to cover the potential liability, or by making express provision in his or her will to cover the eventuality.
There are also potential problems for a parent or grandparent who is keen to help their offspring but at the same time wishes to safeguard the ‘investment’ by adding his or her name to the property register for the property being purchased. From 1st April this year the effect will be akin to the gift horse biting the recipient while his mouth is being inspected, as the overall cost is increasing. The additional 3 per cent stamp duty land tax will be payable on the purchase price, assuming the contributor already owns a residential property in the UK with a value of over £40,000.
A possible solution to this latter issue might be the making of a declaration of trust by the purchasing child/grandchild acknowledging that the sum provided will be returned to the donor on the sale of transfer of the property or on some other trigger event. This has the benefit of flexibility as the terms can be changed relatively easily and it protects the funds not only from the additional rate of SDLT but also from going to the ‘other side’ in the event of a relationship breakdown if it was originally lent to help a young couple buy their first home together.
Sophie Mazzier is counsel at boutique private wealth law firm Maurice Turnor Gardner LLP.